Are SEC Equity Receiverships “Foreign Proceedings” Within the Meaning of UNCITRAL’s Model Law on Cross-Border Insolvencies?

Client Advisory

August 15, 2012

A federal district court in Texas has recently concluded that an SEC equity receivership is collective in nature as that term is used in the definition of a “foreign proceeding” in section 101(23) of the Bankruptcy Code, which is based on the Model Law on Cross-Border Insolvency (the “Model Law”) developed by the United Nations Commission on International Trade Law (“UNCITRAL”). This decision may assist equity receivers appointed in the United States in their efforts to marshal assets and obtain information in foreign jurisdictions around the world.

The case, In re Stanford International Bank, Ltd., 3:09-CV-0721-N (N. D. Tex.), arose out of the notorious international Ponzi scheme masterminded by Allen Stanford, who was recently sentenced to 110 years in prison for securities fraud. The Stanford cases present a striking example of court-appointed representatives competing around the world for control of the assets of a multinational enterprise. The central issue before the Texas court was whether to recognize a liquidation proceeding filed in an Antiguan court as a “foreign proceeding” under Chapter 15 of the United States Bankruptcy Code, 11 U.S.C. §§ 1501 et seq.

Foreign Proceedings Under the Model Law

Chapter 15 is derived from the UNCITRAL Model Law. The United States enacted Chapter 15 in 2005 to assist representatives of debtors in foreign insolvency proceedings to obtain relief in  United States courts, and to foster coordination and cooperation between the insolvency courts of different jurisdictions with concurrent jurisdiction over a debtor’s assets.

The term “foreign proceeding” is defined in the Model Law and in section 101(23) of the U.S. Bankruptcy Code as “a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.”

A U.S. court may recognize an insolvency proceeding commenced in a foreign country as either a foreign “main” or a “non-main” proceeding, depending on the location of the debtor’s center of main interests (often referred to as its “COMI”). The center of main interests term was derived from the European Union Convention on Insolvency Proceedings that was in the process of being adopted when UNCITRAL drafted the Model Law. In the European Union, the COMI location determines the choice of law for most issues. Under the Model Law, however, it determines only whether a proceeding is a foreign main or non-main proceeding. COMI is not a defined term in the European Insolvency Regulation or the Model Law, but the preamble to the European Insolvency Regulation provides that “The ‘centre of main interests’ should correspond to the place where the debtor conducts the administration of his interest on a regular basis and is therefore ascertainable by third parties.” Although there is a presumption that the debtor’s COMI is located in its place of registration, that presumption may be rebutted by objective factors ascertainable to third parties.

A “main proceeding” is one that was filed where the debtor has its COMI, and a “non-main” proceeding arises where the debtor has another non-transitory establishment.  The principal difference between a main proceeding and a non-main proceeding is the relief available following recognition. For example, a representative of a main foreign proceeding is automatically entitled to a stay of all proceedings pending against the debtor in the territorial United States, identical to the stay that automatically arises upon any domestic bankruptcy filing. The foreign representative may recover post-petition transfers of estate property, may sell estate property with all of the protections of section 363 of the Bankruptcy Code, and may, unless the court orders otherwise, operate the business of the debtor. While some of this relief, and other forms of relief, may also be available in non-main proceedings upon specific application and where necessary to effectuate the purposes of Chapter 15 and to protect the assets of the debtor and the interests of the creditors, any such relief granted to a representative of a foreign non-main proceeding must be predicated upon a determination that the relief relates to assets that, under the law of the United States, should be administered in the foreign main proceeding. Litigation about COMI has often been contentious in a number of jurisdictions around the world.

The International Competition For Recognition In The Stanford Cases

Stanford International Bank, Ltd. (“SIB”) was registered in Antigua. It was a member of a group of companies (the “Stanford Entities”) owned directly or indirectly by Allen Stanford, through which he conducted his Ponzi scheme. The SEC commenced an enforcement action under the federal securities laws against SIB, related companies and individuals on February 17, 2009, and immediately obtained the appointment of a receiver to take possession of all assets, wherever located, of the Stanford Entities, and to address all claims asserted against them. [1]

A week later the Financial Services Regulatory Commission of Antigua, an entity that purported to regulate SIB in Antigua, obtained the appointment of joint liquidators for SIB, who placed SIB into liquidation in Antigua. The joint liquidators then sought recognition of the Antiguan proceeding as a foreign main proceeding in the Texas district court where the SEC enforcement action was pending. The receiver’s parallel request for an order entitling him to intervene in the Antiguan liquidation proceeding was denied.[2] Both the receiver and the joint liquidators also sought recognition of their respective proceedings as foreign main proceedings in Canada and the United Kingdom under those countries’ versions of the Model Law, and they both requested the assistance of the Swiss courts in seizing assets of the Stanford Entities located in Swiss banks.[3]   

The Canadian courts denied recognition to the Antiguan proceeding, and granted recognition to the SEC receivership proceedings as a foreign main proceeding, holding that it was in the best interests of the Canadian creditors to cooperate with the U.S. receiver rather than with the Antiguan liquidators. They also held that SIB’s “real and substantial connection” was with the U.S. and not with Antigua (thus locating SIB’s COMI in the U.S.). Finally, they held that the Antiguan liquidators’ wrongful behavior in moving electronic data from SIB’s Canadian computers to Antigua and then erasing the data from the computers before commencing their proceeding for recognition justified denial of recognition to the Antiguan proceeding.

The U.K. courts reached the opposite conclusion, recognizing the Antiguan proceeding as the foreign main proceeding and denying the receiver’s request for recognition. They found that the receivership was not a foreign proceeding because the receiver’s powers derived, not from a law relating to insolvency or adjustment of debt, but from the order appointing him. 

The fact that the court may subsequently make orders which bring into force a process which can be recognized as an insolvency proceeding is immaterial unless and until it is done. The principles of the common law and equity do not “relate to insolvency” unless and until they are activated for that purpose.[4]

The Court of Appeals also found that the receivership was not a collective action because its stated purpose was to prevent waste and dissipation of assets for the principal benefit of investors, not to liquidate assets and distribute proceeds to the wider class of all creditors.[5]

Moreover, the U.K. courts held that SIB’s COMI was at its place of registration in Antigua.  Under the Model Law, the presumption is that the COMI is at the place of registration, and the party objecting to the place of registration as the COMI bears the burden of rebutting the presumption by proving that objective factors ascertainable by third parties place the COMI elsewhere. These rebutting facts must be facts in the public domain and facts that creditors would learn in the ordinary course of business with the company; the purpose of the rule is to ensure that those who deal with a debtor will know what law would govern its insolvency.[6]

The UK courts rejected the receiver’s argument that the existence of fraud by a group of companies required a finding that the COMI of each company is that of the fraudulent entity as a whole, and that because the Stanford Ponzi scheme as a whole was directed from the US, SIB’s COMI should be found to be the US:

[E]ach company or individual has its own COMI. Under [the Model Law], as applied in England and Wales, it is not possible to have a COMI of some loose aggregation of companies and individuals. It follows that there can be no COMI by reference to an entity comprising all those involved in the fraudulent Ponzi scheme. The COMI of SIB depends on the application of the presumption to SIB.[7]

The Swiss court also recognized the Antiguan proceeding and declined to recognize the U.S. receivership.

The Texas Decision

On  July 30, 2012, the Texas district court issued its decision denying recognition to the Antiguan proceeding as a foreign main proceeding. In contrast to the U.K. courts, the Texas court accepted the receiver’s argument that in light of Stanford’s use of all of his companies to perpetuate the fraud, the court should consider the COMI of the Stanford group, rather than of SIB as a stand alone entity. The court pierced the corporate veils of the Stanford Entities and “aggregated” them to determine that the presumption that SIB’s COMI was in Antigua because it was registered there was rebutted by a host of other factors that located the nerve center of the entire fraudulent Stanford enterprise in the United States.[8] As a consequence, the court recognized the Antiguan proceeding as a non-main proceeding.[9]

The issues before the court did not require it to consider whether the receivership was a collective proceeding, as that phrase is used in the definition of a foreign proceeding in Chapter 15 and the Model Law. The Court nevertheless addressed that question directly:

The Court notes language in other U.S. court opinions that contrasts a collective proceeding to a receivership, which they state is non-collective. See, e.g., Betcorp, 400 B.R. at 281. However, those courts describe receiverships as “remed[ies] instigated at the request, and for the benefit, of a single secured creditor.” Id. This is not the type of receivership in place here.   Rather, the Court instituted this Receivership at the request of the SEC for the benefit of all Stanford Entities’ investor-victims and creditors. Thus, although the Court does not need to find that the Receivership is collective in nature, it does so.[10]


An open question is whether the finding that the receivership is collective would require a foreign court to recognize the receivership as a “foreign proceeding” within the meaning of the Model Law. This conclusion may be subject to challenge for several reasons. First, the court focused on the “collective action” part of the definition of a foreign proceeding, and did not address the requirement that that the proceeding also arise “under a law relating to insolvency or adjustment of debt,” which was central to the U.K. courts’ analysis. A critic might agree with the U.K. courts that the order appointing the receiver did not in fact authorize the receiver to act for the benefit of all creditors of the Ponzi scheme. Moreover, as the U.K. Court of Appeals noted, the complaint pursuant to which the receiver was appointed was predicated on the securities laws, which are neither laws relating to insolvency nor to the adjustment of debt. 

Furthermore, as the U.K. Court of Appeals noted, recognition of a foreign proceeding under the Model Law is vested in the domestic court. Identification of the proceeding as a foreign proceeding by the foreign court is not binding on the domestic court. [11]

Finally,  the conclusion is purely dicta: neither the question of whether the receivership is collective, nor the broader question of whether it constitutes a foreign proceeding under the Model Law, was before the court.[12]

But a fundamental problem for the receiver is how to enforce and exercise the world-wide jurisdiction over the Stanford Entities’ assets that the court conferred upon him. The refusal by the U.K. and Swiss courts to recognize the receivership as the main proceeding for the Stanford Entities has undoubtedly hindered the receiver from maximizing recoveries for the fraud victims and creditors.[13] This problem would be alleviated in every country which has adopted the Model Law if the receivership were readily recognized as a foreign proceeding. A more generous interpretation of “foreign proceeding” may also be compatible with the purposes of the Model Law. Thus, while each court must apply its own precedents in analyzing a petition for recognition, a United States district court decision that this kind of equity receivership, which in practice may be the functional equivalent of a bankruptcy case,[14] is a collective proceeding may well be influential with foreign courts considering whether to recognize a receivership.

It may also be helpful to future receivers seeking recognition abroad to arm themselves with orders that contain the direction that the U.K. courts found lacking in the Stanford order. For example, the U.K. Court of Appeals acknowledged that the common law of equity receiverships encompassed the authority to liquidate assets and distribute proceeds to creditors and victims, and also acknowledged that receivers are able to propose subsequent orders providing such authority after they are first appointed. But the court did not find that the order in this case contained such authority, which was fatal to the receiver’s claim.  If the original order appointing a receiver does not contain such authority, the receiver would be well advised to request a supplemental order before seeking recognition abroad as a foreign representative of a foreign proceeding. 

Questions regarding this advisory should be addressed to Susan Power Johnston (212-238-8695,


[1] Federal equity receivers like the Stanford receiver are frequently appointed at the request of the SEC following commencement of enforcement actions in security fraud cases, and in particular in Ponzi schemes like the Stanford scheme. The court has broad equitable discretion to specify the duties the receiver is to carry out, depending on the facts of the case. In general receivers are authorized, as the Stanford receiver was authorized, to operate and/or liquidate the business where appropriate and necessary to maximize asset value, to marshal the assets, and in some cases they are also authorized to devise a fair and equitable claims and distribution process. See Eberhard v. Marcu, 530 F.3d 122, 131-32 (2d. Cir. 2008); and see generally, “Equity Receiverships In SEC Enforcement Actions,” Richard B. Roper, 59 ADVOCTX 26 (2012). These receivers, who are fiduciaries for all creditors and victims of the Ponzi scheme, are comparable to trustees in bankruptcy in regard to their obligations to the creditor body as a whole, and are distinguished from the receivers appointed in jurisdictions around the world at the request of secured creditors, who act only for the secured creditor. 

[2] Antigua has not adopted the Model Law.

[3] Switzerland has not yet adopted the Model Law.

[4] In the Matter of Stanford International Bank LTD, [2010] EWCA Civ. 137, 3 W.L.R. 941, 957.

[5] In the Matter of Stanford International Bank LTD, [2010] EWCA Civ. 137, 3 W.L.R. at 957.

[6] In the Matter of Stanford International Bank LTD, [2010] EWCA Civ. 137, 3 W.L.R. at 967-68; see Re Eurofood IFSC Ltd [2006] Ch. 508.

[7] In the Matter of Stanford International Bank LTD, [2010] EWCA Civ. 137, 3 W.L.R. at 967-68.

[8] The reference to the “nerve center” as the correlative of COMI is based on the Supreme Court’s decision in Hertz Corp. v. Friend, 130 S.C.t 1181, 1192, in which the Court adopted the “nerve center” test for identifying a company’s principal place of business, the concept that U.S. courts often draw on in determining COMI.

[9] The court strictly limited the relief it granted to the joint liquidators to the examination of witnesses and the taking of evidence concerning SIB’s assets, affairs, rights, obligations or liabilities. It then conditioned this very limited relief on a number of stringent obligations which were apparently designed to cure the damage done to the receiver’s efforts to collect the Stanford assets by the liquidators’ opposition abroad: it directed the joint liquidators (a) to make available to the Receiver, the SEC and other interested parties all information relevant to the Stanford Entitles under their possession, control or knowledge wherever located; (b) to use best efforts to obtain reciprocal rights for the Receiver in Antiguan courts; (c) to consult with the Receiver, the SEC and other interested parties and use best efforts to adopt a common claims and/or distribution process; (d) to apply to the Court for the authority to make any payment from Stanford assets for any activity undertaken by them in the United States or to any U.S. person; and (e) to apply to the Court for authority to take any action whatsoever in the United States except for the examination of witnesses and the taking of evidence. They are also precluded from taking any action to disrupt, interfere, or otherwise prevent efforts related to the Receivership by the U.S. Department of Justice, the SEC any other US governmental agency, the Receiver and other interested parties, absent approval of the Court, from duplicating without consent the efforts made by those entities in the prosecution of claims or actions already commenced before the date of the decision, and they are precluded from filing any litigation in the United States absent approval of the Court. Order, July 30, 2012, at 56-58. [ECF # 176] 3:09-cv-00721-N.

[10] Order, July 30, 2012, at 18 n. 20. [ECF # 176] 3:09-cv-00721-N.

[11] See, e.g., In re Stanford International Bank Ltd., [2010 EWCA Civ 137, [2101] 3. W.L.R. 941, *11 (“The proper construction and application of the definition contained in article 2(i) of [the Model Law] is a matter of law for this court….”). 

[12] There is, however, additional U.S. authority for the proposition that federal equity receiverships should be considered insolvency proceedings. In holding that a creditor of a receivership estate’s claim was governed by the law of federal equity receiverships and not by the Uniform Commercial Code, the Second Circuit observed that “An ‘insolvency proceeding’ is ‘any assignment for the benefit of creditors or other proceedings intended to liquidate or rehabilitate the estate of the person involved.” U.C.C. § 1-201(22) (1996). We agree with the District Court that receiverships are ‘insolvency proceedings’….” Securities and Exchange Commission v. Credit Bancorp, Ltd., 290 F.3d 80, 90 (2d Cir. 2002).

[13] It appears from the decision that the Antiguan liquidators have continued to oppose the receiver’s efforts to collect assets:

This action has a peculiarly worrying history. Notwithstanding the Antiguan institution of proceedings despite this Court’s Receivership Order, see supra p. 2, the long account of happenings in the life of this suit demonstrates that the Joint Liquidator’s repeated interference with the Receivership is the norm. For example, early on in the action, without notice to the Receiver or the Canadian court, the Former Joint Liquidators entered one of the Stanford Entities in Canada and wiped its computer systems clean of information [footnote omitted]. Second, the current Joint Liquidators have attempted numerous times to unseat the Receiver from his role as the recognized foreign representative in Canada. Further the Joint Liquidators have actively objected to criminal seizure proceedings by the U.S. Department of Justice (“DOJ”) in Canada, the United Kingdom and Switzerland, 92 at 11-16, and have taken affirmative steps to block the repatriation of Estate assets generally in the United Kingdom and Canada, Hr’g Tr. 50. Fourth, the Joint Liquidators have proven to be extremely litigious and calculating in this Court, filing multiple notices of objection to the Receiver’s requests in this and other Stanford MDL suits, and filing motions to pursue claims the Receiver was already pursuing. [footnote omitted] The Joint Liquidators have admitted that they seek funds first and foremost to fund their current operations, which include challenging the Receiver’s authority worldwide, not to distribute to investor-victims and creditors. Id. at 50-53.

Order, p. 5, July 30, 2012 [ECF 176], 3:09-cv-00721-N.

[14] But see Securities and Exchange Commission v. The American Board of Trade, 830 F.2d 431, 436-37 (2d Cir. 1987), in which the Court of Appeals for the Second Circuit expressed concern about the substitution of equity receiverships, with no statutory guidance for the presentation and adjudication of claims, for the well-developed law governing bankruptcy cases. The Court repeated this concern in SEC v. Malek, 397 F.Appx. 711, *4 (2d Cir. 2010): “[T]his Court has consistently expressed a preference against the liquidation of defendant corporations through the mechanism of federal securities receiverships, as opposed to through the bankruptcy courts. See, e.g., Eberhard, 530 F.3d at 132 (noting that “receivership should not be used as an alternative to bankruptcy”); Am. Bd. of Trade, 830 F.2d at 436 (noting frequent admonition that “equity receiverships should not be used to effect the liquidation of defendants in actions brought under the securities laws”); Esbitt, 335 F.2d at 143 (“We see no reason why violation of the Securities Act should result in the liquidation of an insolvent corporation via an equity receivership instead of the normal bankruptcy procedures....”).” Despite this often expressed preference by the Second Circuit, it has never reversed a district court decision approving a receiver’s liquidation, because by the time the matter reaches the Court of Appeals the receiver has invested so much time and money in the process that it would be wasteful and not in the best interests of the creditors to send the case to bankruptcy court.

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2018 Carter Ledyard & Milburn LLP.
© Copyright 2012

© Copyright 2018 Carter Ledyard & Milburn LLP